Tax and Legal News - June 2025

Constitutional Court puts an end to crown bonds and sends a signal to taxpayers

On 5 May 2025, the Constitutional Court dismissed a complaint in a case concerning crown bonds (I.ÚS 2693/23). The decision appears to have put an end to such cases, and perhaps sent a signal regarding future assessments of tax optimisation.

The story of crown bonds began in 2011. The Czech Republic took advantage of a long-standing rounding provision and issued a series of bonds with a nominal value of CZK 1. However, it was not possible to buy just one; the purchase minimum was a thousand. Thanks to rounding, individuals did not have to pay tax on interest income from the bonds, which sold like hot cakes. The Deputy Minister of Finance described the issue as a legal tax optimization option that had long existed. The State obviously could not deny the need to finance itself through debt and to use the funds obtained for legitimate purposes. Hundreds of private issuers subsequently replicated the issue using the rounding provision in both fortunate and less fortunate circumstances. Many of them ended up with a tax assessment concluding that they had abused the law. With effect from 2013, legislators changed the rounding rules. And from 2020, lawmakers abolished favourable rounding even for the old bonds from 2012.

From today's perspective, there is no point in speculating about individual cases. Instead, it is more useful to think about the future impact. The way in which the complaint was dealt with suggests that the Constitutional Court may have wanted to send a message about future planning.

The Court did not dismiss the complaint as manifestly unfounded, as is common in tax matters (after all, it is an exceptional means of defence), but ordered that it be heard, which led some colleagues on social media to anticipate a fundamental change. However, during the hearing, the Constitutional Court dismissed the constitutional complaint.

The following passages from the decision strike us as key:

• The complainant argued that, under Article 11(5) of the Charter, taxes and fees may only be imposed on the basis of law, concluding that retroactive tax liability was impermissible. She pointed out the vagueness of the law and noted that, in accordance with established case law, it should be interpreted in her favour in cases of doubt (the principle of in dubio mitius).
• The Constitutional Court responded by criticizing the case law for its inconsistent and incorrect application of the principle of in dubio mitius. In its view, the vagueness of the law and the possibility of a different interpretation are not, in themselves, grounds for giving preference to an interpretation that is more favourable to the taxpayer. The aforementioned principle should only be taken into account in situations where there are fundamental doubts about interpretation.
• The complainant further noted that the issuance of crown bonds was a legitimate legal optimization that should be protected by the principles of legal certainty, the protection of legitimate expectations, and good faith.
• However, the Constitutional Court concluded that the context did not provide the complainant with sufficiently strong (justified) confidence in the law and therefore did not prevent the authorities applying the law from enforcing the prohibition of abuse of rights – whether its application meant supplementing the law or interpreting it in a narrower sense.
• According to the Constitutional Court, it is important for assessing the complainant's faith in the law that exceptions to general taxation principles must be based on proper justification with regard to the principle of equality. According to the Court, tax relief is, after all, the economic equivalent of a subsidy.
• It is undoubtedly a matter for the State to grant fewer advantages to one group than to another. However, even here it cannot act arbitrarily. It must demonstrate that it is acting in the public interest and for the public good. The criteria on which such justification is based must be objective, specifically for the area in question.
• When assessing faith in the law, the interpreter of the law should proceed from the understanding that the legislator rationally pursues the public interest.

In simple terms, the Constitutional Court states that tax advantages (in this case, advantageous rounding) constitute an exception to equal treatment. They are equivalent to subsidies and must be objectively justified. When applying tax optimization, taxpayers should take into account that the legislator intended tax advantages to be in the public interest.

Constitutional Court interpretations may evolve over time. American legal realism posits that the application of law is based not only on the interpretation of the text itself, but also on socio-economic reality. The consequences of the adopted interpretation for society and the economy, or even the attitudes and views of individual judges, are taken into account.

It is therefore possible that courts will view similar situations and cases differently in the future. Perhaps they will place greater emphasis on the responsibility of the legislator (when it came to changing the taxation regime for old bonds, why did this happen in 2020 and not in 2013?). Or, in a different context, they will perceive the relationship between the restriction of private property and the need to finance the state differently.

Nonetheless, today's perspective is that tax planning must be based on the paradigms mentioned above.